BEING STREET SMART
By Sy Harding
WHAT'S UNDER THAT ROCK? June 22, 2007.
Merrill Lynch tugged at the corner of a rock this week and it looked like something began to crawl out. They immediately dropped the rock back in place, with help from J.P. Morgan, Blackstone Group, and Bear Stearns.
Of course, I'm talking about how close two hedge funds operated by Bear Stearns came to going belly-up this week, and what was revealed in their skate to the edge.
The largest of the funds was launched ten-months ago, after taking in $600 million of investors' money. As most hedge funds do, the fund then leveraged that capital ten to one by borrowing $6 billion from major institutions including Barclays Bank, J.P. Morgan, and Merrill Lynch. The fund then invested heavily, as have many hedge funds, in collateralized debt obligations, or CDOs.
What is a CDO? Well, you know how lenders have not worried much for years about whether a borrower will be able to pay back a loan, because they take a fee and then sell the loans to others who take on the risk? Those loans, which may be home mortgages, corporate bonds, junk bonds, or whatever, are packaged by Wall Street into collateralized debt obligations (CDOs), which are then sold to investors. It's more complicated than that. For instance, the loan packages are sliced into several layers of risk, called 'tranches', which are sold separately. The lowest quality (highest risk) tranches pay higher rates of interest to the investor, but are at the bottom of the pile if anything goes wrong, such as the original borrowers defaulting on some of the loans.
Unfortunately that is just what has been happening, particularly in the sub-prime mortgage market, where defaults and foreclosures are beginning to soar.
So the Bear Stearns hedge funds ran into trouble. In April the larger one reported it had lost 6.7% of its value due to declines in the value of some of its CDOs. Two weeks later it revised that number to say no, it had lost 18% of its value. The huge revision came after the hedge fund's managers talked with dealers, and were told that some of the funds' CDOs were worth less than the values being carried on the fund's books.
That raised alarms on Wall Street. Stocks and bonds trade on an open market, so they are accurately priced almost by the minute as their value changes. But CDOs, and their various tranches, do not trade on an open market. They are bought by hedge funds, pension plans, mutual funds, and investment banks, and held for the long-term, or at most traded among each other at agreed upon prices.
The Bear Stearns hedge fund managers were apparently not aware of how much their holdings had dropped in value. That prompted Merrill Lynch to rush in and seize $400 million of the hedge fund's assets, with the plan of selling them off to recover some of the money it had loaned to the fund. Meanwhile, the two hedge funds themselves began trying to sell some of their assets. They found the market for them was not very robust. Meanwhile, some investors in the funds began demanding their money back, and it looked like the funds would go belly up.
But whether or not a couple of hedge funds would survive was not the big worry.
The fear is that many other hedge funds are probably also not marking down their share price as the value of the CDOs they invested in decline. If so, and that situation is corrected, one senior Wall Street executive said, "We are going to see billions of dollars of losses across hedge funds and dealers." And who knows what that would do to the stock and bond markets.
So, J.P. Morgan, Barclays Bank, Merrill Lynch, and the Blackstone Group, rushed in with a combination of $billions in cash infusion, and a moratorium on margin calls, in an effort to rescue the two funds. For their part, the two hedge funds announced they will stop trying to sell their assets for now, that they will take months to work the situation out.
So the rock Merrill Lynch had begun to turn over is back in place for the moment.
But Wall Street firms, hedge fund investors, pension plans, etc., have to be concerned about how widespread the problem of hedge funds overstating the value of their holdings, and therefore overstating their profits, might be.
In a major scandal in the 1980s, brokerage firms wound up with multi-billion dollar lawsuits, brought by investors and the Justice Department, when it was learned the firms had not been reporting the declining value of Limited Liability Partnerships (LLPs) they had sold to investors. Since the interest income on the LLPs was still being paid, it had taken years for investors to learn the LLPs had lost 50% to 90% of their value.
With a total of $7 trillion out in mortgage-backed securities, and some 8,000 hedge funds holding a good portion of them, it is not an area that needs to see a problem. For too many years critics have worried that hedge-funds, with their highly leveraged derivatives holdings, are a disaster waiting to happen.
So no wonder the markets were nervous this week, and that Wall Street firms worked so hard to keep that rock in place.
Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com
Zurück
mit den 3 genannten Alternativen wird der Investor wohl eine permanent höhere nahezu risikolose Rendite erziehlen.
